The difference between the value of material outputs and inputs at each stage of production is the value added. The value that the measures of national income and output assign to a good or service is its market value — the price it fetches when bought or sold. Net value added at factor cost is equal to the net domestic product at factor cost, as given by the total of items 1 to 4 of Table 2 Rs. Level of development is also measured by using national income figures. As a result of this, price of the car goes up to Rs.
Consequently, the national income cannot be calculated correctly. Households supply factor inputs to firms via the factor markets. But expenditure on transfer payments is not added, because these payments are not made in exchange for goods and services produced during the current year. In one country there are several individuals who consume a particular good and that too at different places and, therefore, it is very difficult to estimate their total consumption in terms of money. Thus, the concept national income has different meanings.
Government makes payments in the form of pensions, unemployment allowance, subsidies, interest on national debt, etc. Tax is included in the price of a commodity and tax is not a production. However, expenditure on a car by a household is consumption expenditure. It does not measure, for example, activity in the black markets. The total value produced by the economy is the sum of the values-added by every industry. If disposable income is to be deduced from national income, we deduct indirect taxes plus subsidies, direct taxes on personal and on business, social security payments, undistributed corporate profits or business savings from it and add transfer payments and net income from abroad to it.
First, in the light of the definition put forth by Pigou, we have to unnecessarily differentiate between commodities which can and which cannot be exchanged for money. For instance, pensions and unemployment allowances are paid to individuals by the government without doing any productive work during the year. One view is that if police, military, legal and administrative services protect the lives, property and liberty of the people, they are treated as final goods and hence form part of national income. Some fixed equipment wears out, its other components are damaged or destroyed, and still others are rendered obsolete through technological changes. It, therefore, becomes difficult to measure in money the service-value of these goods from the point of view of consumption. Thus, the difference between the value of material outputs and inputs at each stage of production is called the value added. In comparing one year with another, we are faced with the problem that the rupee is not a stable measure of purchasing power.
Which method is to be used depends on the availability of data in a country and the purpose in hand. This is shown in Table 3. Only the finished or final goods are considered as factoring intermediate goods used for manufacturing would amount to double counting. A four-sector economy is called an open economy in the sense that the country gets money by sending its goods outside i. Thus, we focus on firms or sellers which receive payment for the production. Inventory Changes: All inventory changes or changes in stocks whether positive or negative are included in national income. But the interest received on governmental loans has to be excluded, because it is a mere transfer of national income.
It is the cost of production. Factor earnings are incomes of factors of production. Inter-Relationship among different concept of National Income The inter-relationship among the various concept of national income can be shown in the form of equations as under:. It comprises expenses on durable goods like watch, bicycle, radio, etc. First, avoiding double counting, the goods and services which can be measured in money are included in national income. The approaches can yield different results, though theoretically they should equal. Second-hand Goods and Assets: Another problem arises with regard to the sale and purchase of second-hand goods and assets.
Economic Planning: In the present age of planning, the national data are of great importance. The boundary is usually defined by geography or citizenship, and it is also defined as the total income of the nation and also restrict the goods and services that are counted. In turn, national income accounting is crucial to understanding whether a country is entering or exiting prosperous or challenging economic times. Such as production by farmers, production by firms in different industrial sectors, production of goods and services by government, services produced by business intermediaries Viz. As a result, the price of the commodity to the producer is reduced and equals the market price of similar commodity. Concepts of National Income : There are a number of concepts pertaining to national income and methods of measurement relating to them.
But the process of production uses up a certain amount of fixed capital. Services of Housewives: The estimation of the unpaid services of the housewife in the national income presents a serious difficulty. Expenses on education, museums, public health, police, parks, street lighting, civil and judicial administration are consumption expenditure. Similarly, any imported component, such as raw materials, which is used in the manufacture of export goods, is also excluded. Circular Flow of Income : The national income and national product accounts of a country describe the economic performance or production performance of a country. The national income is, therefore, underestimated by excluding the services of a housewife.
That is why when the owner of a firm marries his lady secretary, her services are not included in national income when she stops working as a secretary and becomes a housewife. The actual usefulness of a product its use-value is not measured — assuming the use-value to be any different from its market value. These are systematically classified and entered into national income accounts by the statisticians. Its importance is not in process but in results: Through national income accounting, we have measures such as gross domestic product, unemployment figures, nonfarm statistics and other important economic measures. So price changes do not adequately measure national income. Price Changes: National income by product method is measured by the value of final goods and services at current market prices.
This leads to the problem of double counting which leads to the overestimation of national income. Value of output can never be equal to the value of incomes paid to all productive inputs. Part of this income is used to pay taxes to the government. If, instead he keeps some produce for his self-consumption, it has money value which must be included in national income. For example, the bringing up of a child by the mother, imparting instructions to his son by a teacher, recitals to his friends by a musician, etc.